Facebook (FB) was slammed Wednesday on news that it would spend $2 billion to purchase virtual reality startup Oculus. The company immediately lost $6 billion in market capitalization -- or, as Doug Kass pointed out, the equivalent of three Oculi.
Still, I like this deal, and I like Facebook for the long haul. Facebook is using mostly stock for the Oculus purchase, with only $400 million of the total to be paid in cash, so it's a relatively low-risk transaction. I also liked last month's WhatsApp deal, and the market seemed to concur, as Facebook marched to an all-time high soon afterward.
However, if you have a shorter time frame in mind, you may want to avoid Facebook. Oculus could turn out to be a great investment, but right now it doesn't really matter. What does matter is that Facebook is a high-valuation company: Shares are trading at about 100x this year's earnings, and at 37x next year's estimated earnings. That is exactly the type of stock you don't want to own right now, regardless of how you feel about this deal. It's better to own cheap tech stocks such as Microsoft (MSFT) and Cisco Systems (CSCO), as I've explained here.
Facebook took it on the chin yesterday, plunging below its 50-day moving average (blue) for the first time this year.
What about Facebook rival Twitter (TWTR)? I still think Twitter's potential is underestimated by the market, and I still love it in the long term, but I'm not going to hang on to it as it falls. Twitter is trading at more than 200x next year's earnings estimates, so based on current market trends it is going lower. I'll certainly buy it back when this phase has passed, but there is no point in hanging on when highly valued stocks are so clearly out of favor.